Minnesota will be confronting long-term budget challenges resulting from looming demographic trends. That’s according to the Minnesota Budget Trends Study Commission. The Commission’s report to the legislature was released in January.
The Budget Trends Study Commission was created during the 2007 legislative session and began deliberating in the fall of that year. The Commission consisted of fifteen members appointed by the Governor and legislature. The Commission was charged with “studying the impact Minnesota’s changing demographic trends will have on the long-term stability of state budget conditions, including examining revenue volatility and trend growth rates, current spending pressures, long term revenue forecasts, and projected expenditure obligations.”
The Commission report notes that “Despite continuing to rank high among many key social and economic indicators, Minnesota’s economy has underperformed recently relative to the nation.” For example, employment growth has slowed significantly in Minnesota during the current decade relative to the 1990s. Minnesota 2020 has documented similar deterioration in Minnesota’s performance relative to other states in a number of other areas, including median household income, unemployment levels, and average annual pay.
Going forward, the long-term trends are also bleak. The Commission’s report notes that “Minnesota is currently experiencing a major, long range demographic shift.” The portion of the state’s population of retirement age will increase dramatically over the next decade as members of the baby boom generation retire. In addition, there will be an increase in the portion of the state’s population under age fifteen, although the increase in this age group is not as dramatic as the growth in the number of elderly.
As a result of these trends, Minnesota’s dependency ratio (i.e., the ratio of the number of people under age fifteen and over 64 to the number of people age 15 to 64) will increase by about a third from 2010 to 2030. The rising dependency ratio will have significant repercussions for the state’s budget. The Commission report notes that “a larger dependent population will put upward pressure on government expenditures. Dependent populations rely more heavily on health care, education, economic assistance, and social service programs.”
At the same time that the state will experience increase spending demands, the decline in the working age population will translate into a lower growth rate in Minnesota’s gross domestic product (GDP). Minnesota’s average annual inflation-adjusted GDP growth rate is expected to fall from 5.5 percent from 1996-2001 to 3.4 percent from 2028 to 2033. The lower rate of growth in GDP will translate into lower revenue growth, all other things being equal.
Based on these trends, the Commission concludes that “Minnesota has a long-term structural budget problem, with long-term expenditure growth likely to outpace revenue growth.”
To make matters worse, Minnesota is already facing a $5.5 billion budget deficit for the upcoming biennium. This deficit is not due only to demographic trends, but to a national economic collapse and a policy of undisciplined state tax cuts. The findings of the Budget Trends Study Commission make it clear that we can not count on “growing our way out” of the current deficit problem, as we did in the past.
In testimony before the Senate Finance Committee, Commission co-chairs Jay Kiedrowski and Kevin Goodno made clear that it was not the charge of the Commission to lay out a strategy for dealing with the current deficit. However, common sense suggests a twofold approach.
First, given that the state already has a huge deficit, the state must seek increased efficiency in government spending and weed out unnecessary expenditures. Given that real per capita state general fund spending has already declined by nearly nine percent from FY 2003 to FY 2008, additional cuts in non-essential areas of the state budget will no doubt be difficult, but must nonetheless be made wherever practical.
However, cuts alone are ultimately a defeatist strategy that will do little to slow the trend toward declining GDP growth predicted by the Budget Trends Study Commission. Minnesota also needs to focus on investments that will offset some of the negative trends documented in the Commission’s report. For example, the report notes that declining graduation rates will “threaten our ability to compete in the global economy.” A 2008 Growth & Justice report notes, “At the current rate we are producing students with post-secondary degrees, within two decades Minnesota will not have enough skilled working adults to sustain our economy or quality of life at the levels most of us have enjoyed.”
In addition to education, Minnesota needs to make smart investments in technology and transportation infrastructure and our overall quality of life. These investments offer the only long-term hope of producing, attracting, and keeping the qualified workers needed to replace retiring baby boomers and preventing continued deterioration in Minnesota’s economic performance.
A balanced approach that focuses both on eliminating unnecessary expenditures while increasing essential investments offers the best-indeed, the only-hope of averting a dark economic future for the state.